Ch 03: Assignment - Financial Statements, Cash Flow, and Taxes X 7. The relationship between the book value of shareholders' eauity and the firm's Market Value Added (MVA) and Economic Value Added (EVA) Yesterday, Extensive Enterprise Inc. released its 2015 annual report on the company's website. While reading the report for his boss, Alexis came across several terms about which he was unsure. He leaned around the wall of his cubicle and asked his colleaque, Claire, for help. ALEXIS: Claire, do you have a second to help me with my reading of Extensive's annual report? I've come across several unfamiliar terms, and I want to make sure that I'm interpreting the data and management's comments correctly. For example, one of the footnotes to the financial statements uses "the book value of Extensive's shares," and then in another place, it uses "Economic Value Added." I've never encountered those terms before. Do you know what they're talking about? CLAIRE: Yes, I do. Let's see if we can make these terms make sense by talking through their meaning and their significance to investors. The term book value has several uses. It can refer to a single asset or the company as a whole. When referring to an individual asset, such as a piece equipment, book value refers to the asset's adjusted for any accumulated depreclation or amortization expense. The value, or difference between the machine's historical cost and its accumulated depreciation expense, is called its book value. In contrast, when the term refers to the entire company, t means the total value of the company's as reported in the firm's Ch 03: Assignment Financial Statements, Cash Flow, and Taxes value that can change-but ALEXIS: That makes sense. So, what makes this value important to investors is that It is only due to a couple f events, including the Treasury stock, the sale of new common or preferred shares, and the response to changes in the market prices of the firm's shares Equally important, it chang payment of CLAIRE: Right! So, how useful would firm's book value be for assessing the performance of Extensive's management? ALEXIS: Well, because Extensive's book value with changes in the market price of the firm's shares, the firm's book reflect management's efforts to maximize the price of the firm's common stock and therefore be used value to evaluate management's performance. Now, what about "Economic Value Added"? CLAIRE: During the 1990s, the consulting firm Stern, Stewart & Company developed the concept of Economic Value Added, EVA, to better assess management's performance in maximizing their shareholders' wealth Extensive's EVA equals the additional profit created in excess of the after-tax operating income necessary to finance its total after-tax cost of capital, which from its expressed in annual dollars. It is computed by subtracting Extensive's In turn, Extenslve's annual cost of capltal Is calculated by multiplying Its total operating capltal, which Includes its net fixed assets and net operating working capital, by the after-tax percentage cost of capital. OK, given that description, here's question for vou: Compared to the book value, what is the advantage of using the EVA to evaluate the Ch 03: Assignment Financial Statements, Cash Flow, and Taxes CLAIRE: Durlng the 1990s, the consulting firm Stern, Stewart & Company developed the concept of Economic Value Added assess management's performance in maximizing their shareholders' wealth EVA, to better Extensive's EVA equals the additional profit created in excess of the after-tax operating income necessary to finance its total after-tax cost of from its capital, which expressed annual dollars. It is computed by subtracting Extensive's gofion In turn, Extensive's annual cost of capital is calculated by multiplying its total operating capital, which includes its net fixed assets and net operating working capital, by the after-tax percentage cost of capital OK, given that description, here's question for you: Compared to the book value, what the advantage of using the EVA to evaluate the performance of Extensive's management? OK, it's better to evaluate the performance of Extensive's management by using the company's EVA ALEXIS: Give me a second to think.. the after- rather than the book value f its shareholders' equity because the better the managerlal decisions being made, the the difference between this net operating income and the cost of capital needed to tax net operating income earned, the the EVA, or true economic profit, earned by the company generate that Income, and the CLAIRE: Nicely done! Does this make your reading of Extensive's annual report easier? Save & Continue Grade It Now Continue without saving Ch 03: Assignment - Financial Statements, Cash Flow, and Taxes X 7. The relationship between the book value of shareholders' eauity and the firm's Market Value Added (MVA) and Economic Value Added (EVA) Yesterday, Extensive Enterprise Inc. released its 2015 annual report on the company's website. While reading the report for his boss, Alexis came across several terms about which he was unsure. He leaned around the wall of his cubicle and asked his colleaque, Claire, for help. ALEXIS: Claire, do you have a second to help me with my reading of Extensive's annual report? I've come across several unfamiliar terms, and I want to make sure that I'm interpreting the data and management's comments correctly. For example, one of the footnotes to the financial statements uses "the book value of Extensive's shares," and then in another place, it uses "Economic Value Added." I've never encountered those terms before. Do you know what they're talking about? CLAIRE: Yes, I do. Let's see if we can make these terms make sense by talking through their meaning and their significance to investors. The term book value has several uses. It can refer to a single asset or the company as a whole. When referring to an individual asset, such as a piece equipment, book value refers to the asset's adjusted for any accumulated depreclation or amortization expense. The value, or difference between the machine's historical cost and its accumulated depreciation expense, is called its book value. In contrast, when the term refers to the entire company, t means the total value of the company's as reported in the firm's Ch 03: Assignment Financial Statements, Cash Flow, and Taxes value that can change-but ALEXIS: That makes sense. So, what makes this value important to investors is that It is only due to a couple f events, including the Treasury stock, the sale of new common or preferred shares, and the response to changes in the market prices of the firm's shares Equally important, it chang payment of CLAIRE: Right! So, how useful would firm's book value be for assessing the performance of Extensive's management? ALEXIS: Well, because Extensive's book value with changes in the market price of the firm's shares, the firm's book reflect management's efforts to maximize the price of the firm's common stock and therefore be used value to evaluate management's performance. Now, what about "Economic Value Added"? CLAIRE: During the 1990s, the consulting firm Stern, Stewart & Company developed the concept of Economic Value Added, EVA, to better assess management's performance in maximizing their shareholders' wealth Extensive's EVA equals the additional profit created in excess of the after-tax operating income necessary to finance its total after-tax cost of capital, which from its expressed in annual dollars. It is computed by subtracting Extensive's In turn, Extenslve's annual cost of capltal Is calculated by multiplying Its total operating capltal, which Includes its net fixed assets and net operating working capital, by the after-tax percentage cost of capital. OK, given that description, here's question for vou: Compared to the book value, what is the advantage of using the EVA to evaluate the Ch 03: Assignment Financial Statements, Cash Flow, and Taxes CLAIRE: Durlng the 1990s, the consulting firm Stern, Stewart & Company developed the concept of Economic Value Added assess management's performance in maximizing their shareholders' wealth EVA, to better Extensive's EVA equals the additional profit created in excess of the after-tax operating income necessary to finance its total after-tax cost of from its capital, which expressed annual dollars. It is computed by subtracting Extensive's gofion In turn, Extensive's annual cost of capital is calculated by multiplying its total operating capital, which includes its net fixed assets and net operating working capital, by the after-tax percentage cost of capital OK, given that description, here's question for you: Compared to the book value, what the advantage of using the EVA to evaluate the performance of Extensive's management? OK, it's better to evaluate the performance of Extensive's management by using the company's EVA ALEXIS: Give me a second to think.. the after- rather than the book value f its shareholders' equity because the better the managerlal decisions being made, the the difference between this net operating income and the cost of capital needed to tax net operating income earned, the the EVA, or true economic profit, earned by the company generate that Income, and the CLAIRE: Nicely done! Does this make your reading of Extensive's annual report easier? Save & Continue Grade It Now Continue without saving